Russia Watch: US-Russia summit with low market impact, mid-term predictability

Expectations for substantial progress in US-Russian relations were low, while markets have not been impacted much. Relations will remain complex with risks of setbacks and moderate sanction tightening, while there is a chance to have some mid-term predictability in place.

Expectations for substantial political progress had been low for the meeting of US President Joe Biden and Russian President Vladimir Putin in Geneva, given wide disagreements between the countries on a variety of bilateral and international topics ranging from cyber-attacks, political meddling, Ukraine, Belarus etc. and deteriorating relations for years.

We would not expect substantial progress in resolving the issues around Ukraine (Crimea, Donbas conflict) and Russia-backed Belarus. Still, there is a perception that both sides are interested in a more stable and predictable environment and relationship, which could allow for some cooperation in selective areas (like the earlier successful extension of the New START treaty). Recently waving sanctions on Nord Stream 2 can be also seen as a constructive move by the US towards Russia. Politically, the meeting itself may be already a success for President Putin who can present himself at home and abroad at eye level with the US President. Biden's meeting with European allies and NATO ahead of the one with Putin underline that the US wants to align better with its traditional partners, also with respect to Russia.

Financial markets have not been impacted much by the summit, with the Russian rouble trading stronger below USD/RUB 72 at an oil price rallying to almost USD 75 per bbl (Brent). Russian 10y OFZ benchmark yields hovered around 7.2%. High inflation and the policy reaction by the Central Bank to tighten policy and increase interest rates is currently more in the spotlight of markets and supporting the RUB.

From an economic perspective, Russia may be less pressured to deepen relations with the US and the West, as policies of the recent decade have been pursued to isolate Russia’s economy from external influences and shocks (while remaining a major commodity exporter), building up FX reserves but limiting exposure to the USD and US Treasuries (recent move to de-dollarisation of the sovereign wealth fund), keeping external debt low and following a tight fiscal policy. Going forward, we see the political relation between the US and Russia to remain fraught and complicated, with a high likelihood of setbacks and political noise. The established sanction regime is seen to remain in place and possibly moderately tightened. Nevertheless, we also assess recent US sanctions applied on newly issued RUB denominated government Russian debt as mildest choice for OFZ among tougher options.

All in all, we see a clear US approach to remain in a constructive-critical dialogue with Russia in order to have the back free for other geopolitical issues (above all China). In this respect, we think that Russia now has it very well in hand to avoid tough US economic sanctions in the coming months (and years) if the current level of "strategic stability" is not stretched further. For a selective sanction tightening Russia is well-prepared. However, the Biden administration has made it clear that it will react decisively if necessary. Not to mention that there is considerable legal leeway and political demands for more far-reaching US sanctions against Russia. Further reading: »Fortress Russia« Effective in the Corona and Sanctions Environment Short-Term, More Stagnation and Sanctions Ahead.

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Andreas SCHWABE

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Gunter DEUBER

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Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.